Death to retail: The rise of the online-only brand

How many startups garner 17,000 paying customers in their first seven days? How many more compete with CVS and Walgreens?

When Dollar Shave Club launched in March, the headlines were dumbfounding: Razors? By Subscription? It seemed the feared tech bubble, primed to burst, had finally arrived. However, once you watched Dollar Shave Club’s launch video, “Our Blades Are F***ing Great,” of CEO Mike Dubin deadpanning about his love of fine razors, it all made sense. This wasn’t just another subscription startup. This was the launch of a new brand; a competitor to the Schicks of the world; a new alternative to your trusty, albeit underused, Mach III. For $1 per month, Dubin promised you would get high quality razors delivered to your door. Almost 20,000 people laid down their credit cards in the first week, proving that Kleiner Perkins and other A-list investors were onto something.

Dollar Shave Club isn’t just the culmination of an underserved need for affordable razors. It exemplifies the emergence of the “Online-Only Brand.” Whether it’s underwear from MeUndies, retro glasses from Warby Parker, or luxury soft t-shirts from Everlane, online brands with an irreverent disregard for retail are popping up in every category imaginable. Everlane CEO Michael Preysman told the New York Times “We are going to shut the company down before we go to physical retail.”

These brands represent a new movement in e-commerce, a second generation that is focused on the vertical integration of manufacturing, branding, and distribution—while upending the traditional retail model in the process.

The second generation of e-commerce

This second generation of e-commerce achieves better margins, stronger brands, and lower prices, all through verticalization. By bringing everything in-house, they achieve better margins on lower prices.

For example, Everlane charges $15 for a $50 luxury t-shirt, and Warby Parker offers $99 glasses that are the same quality as Oliver Peoples $350 glasses. Michael Preysman explains: “Traditional retail models are bloated with unnecessary costs. Online just makes more sense: we’re national from day one, we have a single store, we don’t have to cover costs of physical inventory in stores and we don’t have to pass on a 2x markup through retailers.”

As a result, these online-only brands are able to capture more of the profit while providing a lower price. Pranav Vora, CEO of men’s online clothier Hugh and Crye explained that being vertically integrated gives them a leg-up over traditional retail: “We didn’t pursue traditional retail because from concept to launch, being online only means we can do things quicker and with less cost.” This means putting new styles to market with lower costs than a traditional clothing manufacturer.

Online brands such as Everlane are both blessed and cursed by marketing. Traditional retail brands can pay for in-store placements and other offline methods of creating retail serendipity for consumers. Conversely, an online-only brand cannot offer the physical, tangible customer experience of walking by an eye-catching display. Instead they have to focus on leveraging the web and social media to build strong, evocative brands. Dollar Shave Club’s with it’s iconic logo, humorous videos, and quirky niche exemplifies this strong, social brand of the future. As Dollar Shave Club’s Michael Dubin put it, “The soil for our brand’s irreverence and our core message is more fertile on the web. That’s not to say we couldn’t grow in a retail setting, but why did we invent the web if not to have fun taking on the establishment.”

Unlike offline brands, online-only brands only need to drive online purchases, giving them the ability to drive people with purchase intent to make direct transactions. This frees them to laser in on digital marketing. Raptor Ventures’ William Peng explains, “Online only brands can buy traffic online and acquire customers in a cheaper and more quantifiable way than traditional marketing to get foot traffic in physical store locations.” These brands thus get an added efficiency, being able to track their marketing spending and reallocate to the most effective sources.

The first generation of e-commerce

The first generation of e-commerce was the movement of retail goods to online distribution. Amazon is the kingpin of this cohort, generating $48.1 billion in annual revenue by enabling you to buy everything from diapers, to books, to cereal online.

This first generation shifted consumer behavior, teaching people that the web was a legitimate distribution source, and one that usually offered lower prices. However, these lower prices came with margin compression for e-retailers. As a result, Amazon.com and its counterparts have chronically low margins, with Amazon achieving just 3.4% in 2011.The first wave of e-commerce upended how consumers purchase goods, but didn’t solve the problem of dwindling margins that result from offering the low prices that internet consumers seek and expect.

The first generation of e-commerce did not succeed in replacing retail. Customers still felt the need to go instore to touch, see, and understand the differences between products. Amazon and its counterparts served as an alternative purchase point, but not a true discovery point. The second generation of e-commerce emerging today are showing promise to fix the problem of e-commerce discovery. Everlane’s Michael Preysman explained, “Vertically integrated brands change the equation by building trust with the consumer and creating engaging experiences online.

If done correctly, it gives consumers a reason to come back to the site multiple times and tell their friends about their new favorite brand. And once you buy one product from the brand, you become a loyal customer. Vertically integrated brands have the opportunity to address fit, quality, and choice all in one.” Previous e-commerce companies have tried to solve the quality and discovery problem by overly generous return policies. For example, Zappos allows you to buy unlimited pairs of shoes with free shipping and free return shipping. You can turn your apartment into a shoe rack at their expense. But for Zappos and its counterparts, this further eats into margins. Online-only brands are getting around this by providing a consistent, high quality product experience.

The future

The rise of the online-only brand marks a new generation of e-commerce. For consumers, it represents the rise of more-affordable, higher-quality brands that will come to replace many things previously purchased through traditional retail. Watch in the next year as more online-only brands emerge. How about online-only watches? Cereal? Makeup? The opportunities to build mega-brands online are just beginning. Entrepreneurs and investors are already piling in. Now it’s up to the consumer to decide the winners.

Allen Gannett is an entrepreneur and investor. Currently, he is the founder and Chief Maven of TrackMaven, the competitive intelligence platform for enterprise marketers. He is a partner at Acceleprise, the enterprise technology accelerator. Previously, he co-founded CampusSplash. He is a pumpkin pie addict, a former castmember on MTV's Movers and Changers, and a failed Wheel of Fortune contestant. You can follow him on Twitter: @Allen.